UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

Transcription

1 UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA Ritchie Capital Management, L.L.C., as administrative and collateral agent, Ritchie Special Credit Investments, Ltd., Rhone Holdings II Ltd., Yorkville Investments I, L.L.C., and Ritchie Capital Structure Arbitrage Trading, Ltd., Appellants, Civil Case No (SRN) [SEALED] MEMORANDUM OPINION & ORDER v. John Stoebner, Trustee, Appellee. James M. Jorissen, Leonard, O Brien, Spencer, Gale & Sayre, Ltd., 100 South Fifth Street, Suite 2500, Minneapolis, Minnesota 55402; Brian A. McAleenan and Michael J. La Mare, Sidley Austin, LLP - IL, One South Dearborn Street, Chicago, Illinois, 60603, for Appellants George H. Singer, Mark S. Enslin, Sandra S. Smalley-Fleming, and Terrence J. Fleming, Lindquist & Vennum, PLLP, 80 South Eighth Street, Suite 4200, Minneapolis, Minnesota 55402, for Appellee SUSAN RICHARD NELSON, United States District Judge Appellants/Defendants Ritchie Capital Management, L.L.C., Ritchie Special Credit Investments, Ltd., Rhone Holdings II Ltd., Yorkville Investments I, L.L.C., and Ritchie Capital Structure Arbitrage Trading, Ltd. (collectively, Ritchie Entities ) appeal from a November 6, 2012 amended partial final judgment of the United States Bankruptcy Court for the District of Minnesota ( Bankruptcy Court ) [Doc. No. 1-10] in the matter of In re Polaroid Corp, 08-BR (Transmittal of Appeal [Doc. No. 1].)

2 The amended partial final judgment is based upon a March 30, 2012 Order on Defendants motion to strike an affidavit filed by Appellee/Trustee/Plaintiff, John Stoebner (the Strike Order at [Doc. No. 21]), and the April 30, 2012 Order on Plaintiff s partial summary judgment motion ( Partial Summary Judgment Order at [Doc. No. 21]). For the reasons set forth herein, Appellants appeal is denied. I. BACKGROUND This case arises from underlying bankruptcy proceedings involving Polaroid Corporation and other affiliated Polaroid entities (collectively, Polaroid ). In December 2008, Polaroid filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Minnesota. Stoebner v. Ritchie Capital Mgmt. (In re Polaroid Corp.) ( In re Polaroid ), 472 B.R. 22, 27 (Bankr. D. Minn. 2012). In February 2009, the Polaroid Corporation, in the capacity of debtor-in-possession, commenced an adversary proceeding against the Ritchie Entities in Bankruptcy Court. Id. at 27, n.1. The proceeding was subsequently converted to a case under Chapter 7, at which time Appellee-Trustee John R. Stoebner was substituted as the plaintiff. Id. at 29. The Trustee seeks to avoid certain liens that Polaroid had granted to the Ritchie Entities pursuant to a September 19, 2008 Trademark Security Agreement, and the disallowance of claims based on that agreement. Id. A. Tom Petters Ponzi Scheme The facts concerning non-party Tom Petters relationship with Polaroid as well as 2

3 Petters operation of a Ponzi scheme are central to the issues before this court. 1 The background information regarding the Ponzi scheme is set forth in Chief Bankruptcy Judge Gregory F. Kishel s Partial Summary Judgment Order. In re Polaroid, 472 B.R. at 27-28; As noted in that order, Petters was convicted for crimes related to his $3 billion Ponzi scheme and is serving a fifty-year prison sentence. Id. at 28, n.3. Appellants do not appear to contest the Bankruptcy Court s underlying factual recitation regarding the general operation of Petters Ponzi scheme, as their understanding of the background facts is essentially the same. (See Appellants Mem. at 7-8 [Doc. No. 21].) 3 In any event, the Bankruptcy Court s recitation of the background facts is consistent with several decisions of the Eighth Circuit Court of Appeals, which has considered Petters Ponzi scheme in various contexts. See United States v. White, 675 F.3d 1073 (8th Cir. 2012); United States v. Petters, 663 F.3d 375 (8th Cir. 2011), cert. denied, 132 S. Ct (2012); Ritchie Capital Mgmt. LLC v. Jeffries, 653 F.3d 755 (8th Cir. 2011); United States v. Reynolds, 643 F.3d 1130 (8th Cir. 2011); United States v. Ritchie Special Credit Invs., Ltd., 620 F.3d 824 (8th Cir. 2010). 1 A Ponzi scheme generally describes a fraudulent investment scheme in which money taken from later participants is paid to earlier participants to create the false appearance that the scheme is generating returns. See Cunningham v. Brown, 265 U.S. 1, 7 9 (1924) (describing the schemes of Charles Ponzi). 2 For ease of citation, the Court refers to the published version of the Bankruptcy Court s underlying opinion, In re Polaroid Corp., 472 B.R Page citations to the parties memoranda refer to the parties own internal page number found at the bottom of their respective memoranda, as opposed to the District Court s page numbering, which appears at the top of each page. 3

4 In brief, Petters owned numerous businesses, including Petters Group Worldwide LLC (PGW), Petters Company, Inc. (PCI), Sun Country Airlines, Polaroid Corporation, and Fingerhut. Petters, 663 F.3d at 379. PGW and PCI were the two primary companies owned by Petters. Ritchie, 653 F.3d at 758. As to PGW, this Petters entity held investments in numerous companies, and its principal asset was its stock in Polaroid. Ritchie Special Credit Invs., 620 F.3d at 850. [T]he ownership of Polaroid was traceable through an intermediate holding entity to [PGW], itself a holding company. In re Polaroid, 472 B.R. at 27. As alleged in Petters criminal indictment, PGW was implicated in the scheme as an alleged recipient and conduit of a significant portion of the funding that had been received by PCI or its subsidiary entities. In re Polaroid, 472 B.R. at 28. Petters was the sole shareholder, board chair, and CEO of PGW. Id. at 27. PCI functioned as the venture capital arm of the Petters enterprises, utilizing single purpose, or special purpose entities, to obtain billions of dollars of funding. Ritchie Special Credit Invs., 620 F.3d at 850; In re Polaroid, 472 B.R. at This funding was purportedly used for Petters diverting business, which contemplated PCI s purchase of electronic goods at wholesale to be resold, at a substantial profit, to large retailers. Id.; Petters, 663 F.3d at 379; Reynolds, 643 F.3d at In reality, however, [t]he scheme was a classic Ponzi scheme, as the Eighth Circuit has found: Investors were told that their money would be used to purchase consumer electronics that would be sold to big box retailers at a substantial profit. Petters, along with his colleagues including Deanna Coleman and Robert White used fabricated documents that purported to show the purchase of goods from vendors and the resale of the goods to retailers. Other fabricated documents showed Petters s company wiring funds to the vendors, giving the appearance that the company was investing its own funds. Early 4

5 investors realized a return on their investment, but that return came from funds from new investors, funds from legitimate transactions, and, in some cases, funds from their own investments. Reynolds, 643 F.3d at 1132; see also In re Polaroid, 472 B.R. at The Bankruptcy Court found that Petters Ponzi scheme was most centrally purveyed through PCI and a number of its many subsidiaries, but eventually involving more of his companies in the flow of money to keep it going. In re Polaroid, 472 B.R. at 36. PCI formed several pass-through special purpose entities for the financing of large institutional investors. (Martens Aff. 4, APP ) These special purpose entities were PC Funding, LLC (assigned to Opportunity Finance, LLC); Thousand Lakes, LLC (assigned to Lancelot Investors Fund); SPF Funding, LLC; PL Ltd., Inc.; Edge One, LLC; MGC Finance, Inc. (assigned to Metro Gem, Inc.); Palm Beach Finance Holdings, Inc. (assigned to Palm Beach Finance Partners, LP); and PAC Funding, LLC (assigned to Acorn Capital Group). (Id.) Very few genuine diverting transactions occurred through PCI and its subsidiary structure. In re Polaroid, 472 B.R. at 38. As PCI s Vice President of Operations Deanna Coleman testified, in 2007 and 2008, she spent most of her time keeping the Ponzi scheme afloat by creating fictitious purchase orders and working with investors. (Coleman 7/28/10 Dep. at 192, APP ) In short, PCI did not have any real transactions. They were all fraudulent transactions. (Martens 10/7/10 Dep. at 164, APP ) Tom Petters owned 100% of PCI (id. at 174), proclaiming at trial, I am PCI. (Petters Trial Tr. at 3170, APP ) Petters Ponzi scheme began to officially and permanently unravel on September 5

6 8, 2008, when Deanna Coleman revealed to government authorities that she was assisting Petters in perpetrating a massive fraud through PCI. Petters, 663 F.3d at 379. Based on Coleman s information and a federal investigation, the Federal Bureau of Investigation, the Internal Revenue Service, and the United States Postal Inspection Service executed search warrants at Petters business headquarters and home on September 24, Id. The searches uncovered counterfeit purchase orders purporting to show that PCI was owed over $3 billion by various retailers. Id. As noted, Petters and his co-conspirators were indicted and convicted for their participation in the Ponzi scheme. In re Polaroid, 472 B.R. at 28. B. Polaroid Acquisition In 2005, Petters used the proceeds of the Ponzi scheme to purchase Polaroid. (Petters Trial Tr. at 3170, APP ; Martens 10/7/10 Dep. at , APP ; Martens Aff. 3, APP ; In re Polaroid, 472 B.R. at ) Deanna Coleman testified that Petters bought Polaroid in order to lure investors in so investors would think Tom was this wealthy guy. In re Polaroid, 472 B.R. at 39, n.28 (citing Coleman Dep. at 111). Coleman further explained at Petters trial that Petters wanted to buy a viable company making licensed goods to eventually bury PCI (Petters Trial Tr. at 821, APP ) Deanna Coleman helped raise money for the Polaroid acquisition. (Trustee s Bankr. Ct. Reply Mem. at 6-7, APP ) (citing Coleman Dep. at ) While PGW technically owned Polaroid, Coleman testified that PCI paid for Polaroid, or at least 99 percent of it. (Petters Trial Tr. at 690, APP ; Trustee s Bankr. Ct. Reply 6

7 Mem. at 7, APP ) (quoting Coleman Dep. at ) Coleman personally wired the money out of PCI to buy Polaroid. (Trustee s Bankr. Ct. Reply Mem. at 7, APP ) (quoting Coleman Dep. at ) Kathy Klug, an IRS special agent and government witness at Petters criminal trial, testified that PGW got its money from PCI. (Petters Trial Tr. at 2366, APP ) Forensic accountant Theodore Martens testified that one account at PCI was used to fund the pre-purchase of Polaroid and no other accounts were involved. (Martens 10/7/10 Dep. at 143, APP ) Petters paid $425 million for Polaroid (Martens Aff. 2, APP ), investing $150 of his own money and raising $250 million from commercial lenders, who, by the time of the collapse of the Ponzi scheme, had been repaid. David Phelps, Polaroid is Latest Petters Firm to File Chapter 11, Mpls. StarTribune, Dec. 18, 2008, APP Coleman admitted to taking investors money and using those funds to buy Polaroid. (Petters Trial Tr. at 690, APP ) IRS Special Agent Klug confirmed that her investigation revealed a Wells Fargo account created for the acquisition of Polaroid, funded from [p]redominantly investors or pretty much investors. (Petters Trial Tr. at , APP ) Some of the money used to acquire Polaroid came from the Lancelot Investment Management ( Lancelot ), headed by Gregory Bell, as well as from Metro Gem, Inc., run by Frank Vennes. (Martens 10/7/10 Dep. at 150; 156, APP ; APP ; Trustee s Bankr. Ct. Reply Mem. at 6-7, APP ) (citing Coleman Dep. at ). Lancelot and Metro Gem only invested with PCI and Tom Petters. (Martens 10/7/10 Dep. at 150; 156, APP ; APP ) Both Bell and Vennes were convicted of securities fraud in connection with raising funds for 7

8 Petters Ponzi scheme. United States v. Bell, 09-CR-269 (RHK) [Doc. Nos. 42; 68]; United States v. Vennes, 11-CR-141(1) (RHK/JJK) [Doc. Nos. 167; 291]. Petters himself also testified at trial regarding the acquisition of Polaroid: Q: You bought Polaroid in April of 2005? A: Yes. Q: Again, you used PCI money and PCI investor money? A: Yes. Q: The money they thought was secured by collateral that did not exist? A: Well, I think Polaroid was valued at $80 million. Q: But the PCI investors for the money that you used to actually buy the Polaroid company was secured by merchandise collateral. That s what they thought they were financing? A: I m not familiar with that. Q: You don t dispute it? A: I don t dispute it. But I m not familiar with that. Q: And so the money that you took from PCI investors to buy $450 million of Polaroid, that just dug the hole a little deeper? A: Digging the hole deeper. (Petters Trial Tr. at 3170, APP ) While PCI funds paid for the purchase of Polaroid, the official ownership of Polaroid was traceable to PGW. In re Polaroid, 472 B.R. at PGW s financial stability was important to Polaroid, as PGW s finances affected Polaroid s efforts to raise financing. (Jeffries 4/13/10 Dep. at , APP ; see also Dugan Dep. at , APP (testifying, as Polaroid s Vice President of Strategic Planning and Business Development, that a loan default by PGW would limit Polaroid s ability to raise finances.) Although both PCI and Polaroid were owned by Petters and shared debt, Polaroid operated independently of PCI and Petters diverting business. (Jeffries 4/13/10 Dep. at , APP ) Polaroid maintained separate management and had a separate financial department. (McDonough Dep. at 29, APP ) Petters, 8

9 however, was the sole board member of Polaroid and the 100% beneficial owner of Polaroid s stock. (Jeffries 4/13/10 Dep. at 178, APP ; In re Polaroid, 472 B.R. at 41, n.32.) Mary Jeffries became Polaroid s CEO in April (Jeffries 4/13/10 Dep. at 21, APP ) Prior to becoming CEO of Polaroid, Mary Jeffries worked for PGW as a Petters Strategic Partner, beginning in 2005, and was promoted to PGW s Chief Operating Officer ( COO ) a few months later. (Id. at 17; 20, APP ) In the COO position at PGW, Jeffries had frequent contact with Tom Petters, whose office was next to hers. (Id. at , APP ) Jeffries testified that during her time at PGW, she had no suspicions that Petters was engaged in any fraudulent activity. (Jeffries 9/29/10 Dep. at 49-50, APP ) While at Polaroid, Jeffries continued to maintain contact with Petters several times per week. (Jeffries 4/13/10 Dep. at 211, APP ) Jeffries testified that Polaroid was never involved in the Ponzi scheme (Jeffries 4/13/10 Dep. at 176, APP ), nor was Polaroid s management aware of the scheme. (Jeffries 9/29/10 Dep. at 55-57, APP ) Despite her proximity and access to Petters, Jeffries testified that she was shocked to learn of Petters fraudulent activities. (Id. at 54, APP ) To her knowledge, during her tenure at PGW and Polaroid, Polaroid s sole source of income and revenue was generated from legitimate business activities. (9/30/10 Jeffries Dep. at 97, APP ) In early 2008, Polaroid sought financing from outside investors in order to pay off a $31 million loan to J.P. Morgan. (Jeffries 4/13/10 Dep. at 85-88, APP ) The J.P. Morgan loan was secured by all of Polaroid s assets. (Id. at 88, APP ) 9

10 When the J.P. Morgan loan was paid off, Polaroid s assets would be unencumbered. (Id.) The loan was ultimately paid off with cash from a Wal-Mart prepayment. (Jeffries 9/30/10 Dep. at 76, APP ) Jeffries understood that Polaroid s value in February 2008 was approximately $780 million. (Jeffries 4/13/10 Dept. at 89, APP ) A few months earlier, in September 2007, Polaroid s Vice President of Strategic Planning and Business Development Katherine Dugan was involved in efforts to place a value on the Polaroid brand. (Dugan Dep. at 35-36, APP ) Although a previous brand valuation had been undertaken in 2004 or 2005, Polaroid sought an updated valuation due to the passage of time and because an up-to-date valuation would assist in Polaroid s refinancing efforts. (Id. at 38, APP ) The previous 2007 valuation, performed by the financial advisory firm of Duff & Phelps, was based on Polaroid s then-existing business model, which focused primarily on North American and Western European sales. (Id.) The Duff &Phelps valuation of $325 million did not, therefore, reflect the value of any Polaroid trademarks outside of those areas. (Id. at 39; 62, APP ; APP ) Petters himself testified that if Polaroid could sell its licenses, the company s value would be significantly greater close to $4.3 billion. (Petters Trial Tr. at 3044, APP ) At the same time that Polaroid was seeking to pay off its JP Morgan loan, it was attempting to change its business model in order to reduce its working capital needs, as Jeffries testified: 10

11 We went from carrying inventory on the consumer electronics side of the business to more of an indirect [model] where we were an intermediary and licensing the brand and providing services so that we wouldn t have to finance the inventory. So it reduced our working capital requirements. (Jeffries 9/29/10 Dep. at 71-72, APP ) Under this new business model, Polaroid planned to enter into agreements with manufacturers, allowing them to use the Polaroid name on products that the manufacturers would sell directly to retailers. (McDonough Dep. at 19, APP ) The retailer would then make payments to both Polaroid and to the manufacturer. (Id.) Jeffries believed that as Polaroid moved away from selling to retailers toward more of a licensing business, the company s cash needs would decrease. (Jeffries 9/30/10 Dep. at 67-69, APP ) C. Ritchie Loans By January 2008, Petters Ponzi scheme experienced strain, particularly as the United States economy was slowing and business credit became more difficult to obtain. In re Polaroid, 472 B.R. at 42. Petters testified in his criminal trial that, specifically as to PGW, we suddenly had major cash flow problems in late 2007 or early (Petters Trial Tr. at 3042, APP ) Around the beginning of 2008, David Baer, PGW s Chief Legal Officer, heard Tom Petters use the term bad paper in discussions with various people, including Polaroid s Mary Jeffries and tax accountant James Wehmhoff, PGW s Executive Vice President in charge of tax, treasury and finance. (Baer Dep. at 651, APP ) While Baer was unsure what specifically constituted the problems with bad paper, Baer generally understood that Petters use of the term included problems with slow payments, the faltering general economy, merchandise delays, 11

12 defective products, and general dilution. (Id. at ; 717, APP ) Baer testified that Petters estimated that 20 to 25% of PCI s loans were bad paper. (Id. at 652, APP ) In late January 2008, an investment broker-finder named George Johnson contacted Thane Ritchie, CEO of Ritchie Capital Management, LLC ( Ritchie Capital ) and founder of the Ritchie Entities, about the possibility of the Ritchie Entities participation in a short-term financing deal. In re Polaroid, 472 B.R. at 43. The broker indicated that the deal would be secured by the assets of a company with value far exceeding the value of the note. Id. (citing chain between G. Johnson and T. Ritchie). Johnson urged Ritchie to move fast, if he was interested in lending finances, because Johnson was aware of other interested parties. ( chain of 2/1/08 between G. Johnson and T. Ritchie, APP ) In response to Ritchie s query about the particular assets and company, Johnson replied that the deal would involve a 90-day loan, at 20% interest, 80% annualized, backed by the entire Polaroid Corporation. ( chain of 2/1/08 between G. Johnson and T. Ritchie, APP ) Ritchie was familiar with Tom Petters, although Ritchie Capital had not previously invested in any of Tom Petters business entities. (Ritchie Dep. at 25, R.APP00016.) However, Ritchie s funds-to-funds group, known as Ritchie Multi-Manager, had invested in Lancelot, which in turn, invested hedge fund assets with Petters. (Id.) Shortly after receiving Johnson s s, Petters, Ritchie, and Johnson held a conference call. In re Polaroid, 472 B.R. at 43. During the call, Tom Petters expressed his desire to bridge a loan or sale of Polaroid s North American brand to the Iconix Corporation. 12

13 (Ritchie Dep. at 45, R.APP00017.) Regarding the possible sale to Iconix, Ritchie testified that Petters expressed a need to kind of clean up some paper around Polaroid to do that. (Id. at 66, R.APP00018.) The paper in question was a $31 million loan to Polaroid for which payment was due to JP Morgan. (Id. at 45, R.APP00017.) In connection with the Ritchie loan transaction, a Petters Capital employee, Camille Chee-Awai, ed Thane Ritchie several Polaroid-related documents, including a 2006 audited financial statement and an evaluation of the Polaroid brands. ( chain between C. Chee-Awai and T. Ritchie, APP ) As to any due diligence analysis undertaken by the Ritchie Entities, Ritchie testified: We had hired a guy initially named Jeff Nason that did due diligence on Tom Petters when we first invested in Lancelot, and somebody did some work when we looked at the Polaroid deal in 05. I remember we had a package and we looked at the deal. They never made a formal proposal. We dug into the balance sheet and the value of Polaroid at the time. At the time I think they were estimating its value of over a billion dollars. So we were pretty comfortable I think with the asset at the time. And Jeff had done due diligence roughly six, seven years earlier, and I think did some follow-up due diligence along the way. So, I think in terms of due diligence we had done a lot of due diligence going into February 2008 on Tom Petters and Polaroid. (Ritchie Dep. at 68, R.APP00018.) Accordingly, Ritchie Capital relied on the Duff & Phelps report and other information that Petters provided, Northern Trust letter saying that he was in high standing, other things like that. (Id. at 69, R.APP00018.) Ritchie did not ask Jeff Nason to perform an updated investigation prior to issuing any 2008 loans to Polaroid or the Petters entities, explaining that he felt that Polaroid was pretty straightforward. I don t think we were it was a different kind of investment, so we 13

14 didn t really see the need to hire Jeff to do that? (Id. at 71, APP ) Instead, Ritchie preferred to rely on people that had done due diligence on Petters and Petters interest entities that knew those entities much better than we. And if we had done our own diligence, we probably would have been going to those people anyway. So simpler to see the [Duff & Phelps] summary than to pay for it to do it all over again by the same people that have already done it. (Id. at 72, APP ) 1. February 1, 2008 Promissory Note An agreement was soon reached, as reflected in the February 1, 2008 Promissory Note between Ritchie, PGW, and Tom Petters. (2/1/08 Promissory Note, APP ) The note provided for $31 million in principal, payable in 90 days, at an interest of 80% on an annualized basis. (Id.) PGW and Tom Petters were signatories to the note, and Petters pledged a personal guarantee. (Id.) Petters further agreed to attempt to secure the note by a pledge of 100% of Polaroid s capital stock, as soon as reasonably practicable. (Id.) David Baer, Chief Legal Officer at PGW, testified that the note contained the as soon as practicable language because at the time it was signed, Polaroid s stock was still encumbered by its JP Morgan loan. (Baer Dep. at 96, APP ) On February 1, 2008, a Ritchie entity wired the PGW/Tom Petters loan proceeds to an account at M&I Bank. ( from D. Baer to J. Wappler, APP ) PGW s James Wehmhoff recalled that Deanna Coleman instructed him to transfer the funds to her at PCI immediately, as soon as the funds cleared M&I Bank. (Wehmhoff Dep. at 16-17, APP ) Wehmhoff verified the disposition of the funds with Tom 14

15 Petters himself. (Id. at 17, APP ) Coleman confirmed that she had telephone conversations with Wehmhoff, asking him to transfer any of the Ritchie loan proceeds in February 2008 to PCI. (Coleman Dep. at , APP ) Coleman made the request [b]ecause I had investors to pay and he had control over the PGW account. (Id. at 241.) Because all of the loan proceeds of this loan and subsequent loans were transferred to PCI, PGW which owned Polaroid did not have the use of any of the Ritchie loan funds. (Wehmhoff Dep. at 16, APP ) Since PGW was one of the two borrowers on the February 1, 2008 Promissory Note, PGW s James Wehmhoff was concerned about the transmission of the funds to PCI: it was another $32 million that [PGW] would have to try to come up with.... (Id. at 15, APP ) The money was also not transmitted to Polaroid. (Jeffries Dep. of 4/13/10 at , ; R.APP00244, R.APP00250; Martens Aff. 8, APP ) Instead, upon receiving the loan proceeds, PCI transferred $31 million to prior lender-investors that same day. (Martens Aff. 4, 8; Pricewaterhouse Coopers ( PwC ) Preliminary Analysis of Ritchie & Assoc. Funds Note Payable Detail ( PwC Preliminary Analysis ) at 11-15, Ex. 295 to Martens Dep. [Doc. No. 38-4]; see also Coleman Dep. at , APP ) The following day, after the note had been signed and the $31 million in proceeds had been disbursed, Thane Ritchie asked John Wappler, an associate at Ritchie Capital Management, and John Kermath, the president of Ritchie Capital Management, to review the Polaroid documents sent by Chee-Awai, because he need[ed] to know what Polaroid equity is worth. ( from T. Ritchie to J. Kermath and others, APP ) Wappler responded to Ritchie s request on February 3, noting Polaroid s most recent net 15

16 losses in 2006 and 2007, but concluding that the amount that Petters paid for Polaroid in 2005 was probably as good an estimate as any for the value of Polaroid s equity. ( chain between J. Wappler to T. Ritchie, APP ) Ritchie also asked whether given the current economy[,] would we lend 100 million at 80% IRR [Internal Rate of Return] for 90 days against a pledge of 2/3s of the Polaroid equity? (Id.) Wappler responded, requesting confirmation of his understanding that the proposed loan was being used for activities that were 100% unrelated to Polaroid so that if the idea that the loan proceeds are being used for doesn t pan out, Polaroid value is unaffected. (Id.) In a subsequent February 3, from John Kermath to Thane Ritchie and others, Kermath who had only learned of the loan s existence after-the-fact stated that he was [s]till thinking through the issue of lending money to the sponsor against company stock where the key lender to the company is the sponsor (and has a demand note). (Kermath Dep. at 63, APP ; chain between T. Ritchie, J. Kermath, J. Wappler and others, R.APP00236.) Kermath characterized this arrangement as [p]retty unusual, and expressed his concerns about future loans to Petters: At first blush, with $31MM loan outstanding[,] I m not worried. At $100MM, I m more worried and we are in a stretched position. (Id.) Ritchie responded the following day, February 4, 2008, stating, nothing usual about this deal[,] including the IRR!! need to make sure we get the pledge against Pol[aroid] all lined up this week standstill or first right of refusal makes sense. (Id.) 16

17 In addition to Thane Ritchie, others viewed the 80% interest rate on the February 1 Note as unusually high. Kermath, President of Ritchie Capital, acknowledged that Ritchie did not assess an 80% interest against any other loans in its portfolio at the time. (Kermath Dep. at 79, APP ) Simon Root, an attorney working on drafts of the Ritchie-Petters loan agreements on Petters behalf, was shocked by the 80% interest rate on the February 2008 Ritchie notes (Root Dep. at 56; 132, APP ; APP ) James Wehmhoff, PGW s Executive Vice President of Tax, Finance and Treasury, who was not involved in the negotiation of the Ritchie loans, assumed the 80% interest rate was a typo when he first read the promissory note. (Wehmhoff Dep. at 14-15, APP ) As to the language in the loan agreement contemplating an eventual pledge of Polaroid stock, Kermath testified that he wanted both a personal guarantee from Tom Petters as well as a pledge of stock from Polaroid to secure the loans, [b]ecause I like to get more than less. (Kermath Dep. at 144, APP ) Petters attorney Root understood that the collateral was going to be either the Polaroid stock or Tom personally, kind of an either or situation. (Root Dep. at 134, APP ) 2. Additional February 2008 Promissory Notes Whatever concerns that Wappler or Kermath may have had about loaning to the Petters Entities, on February 4, the Ritchie Entities advanced an additional $56 million to PCI via wire transfer. (Martens Aff. 4, 8, APP ; PwC Preliminary Analysis at 11-15, Ex. 295 to Martens Dep. [Doc. No. 38-4]; Promissory Notes of 2/4/08, APP ) That same day, PCI disbursed $55 million to different lenders who 17

18 had previously advanced funds to PCI as part of its fraudulent diverting business. (Martens Aff. 4, 8, APP ; PwC Preliminary Analysis at 11-15, Ex. 295 to Martens Dep. [Doc. No. 38-4].) On February 5, 7, 15, and 19, the Ritchie Entities provided $59 million in additional funds to PCI through wire transfers pursuant to additional promissory notes. (Id.; February Notes, APP ) The borrowers on each of the notes were PGW and Tom Petters, personally, and bore an 80% annual interest rate. (February Notes, APP ) By February 19, 2008, Petters had executed ten separate promissary notes on behalf of PGW and himself (the February Notes ), totaling $146 million. (Id.) Three of the notes were due in March 2008, while the remainder were due in May (Id.) The Ritchie Entities later assigned two of the February Notes, with a $25 million face value, to a third party. (Appellants Mem. at 9 [Doc. No. 21].) On each of the additional four February 2008 loan dates, PCI again disbursed funds to benefit prior lenders in amounts equal to or larger than the Ritchie Entities had lent. (Martens Aff. 4, 8, APP ; PwC Preliminary Analysis at 11-15, Ex. 295 to Martens Dep. [Doc. No. 38-4].) Again, Mary Jeffries testified that Polaroid did not receive any of these funds. (Jeffries Dep. of 4/13/10 at , R.APP00244.) 3. February 19, 2008 Note Purchase Agreement On the same day that the February 19, 2008 loan was executed, Thane Ritchie and Tom Petters executed an additional agreement, a Note Purchase Agreement, memorializing the terms for the previously-made loan advances and consequences for default. (Note Purchase Agmt., APP ) The Note Purchase Agreement 18

19 identified Petters and PGW as the Borrowers, and Ritchie Capital Management as the initial Administrative Agent. (Id.) The signatory parties to the agreement were PGW and Ritchie Capital Management. (Id. at APP ) Under the agreement, the obligations of Petters and PGW were to a group of Purchasers (several of the appellants in this case): Ritchie Special Credit Investments, Ltd., Rhone Holdings II, Ltd., and Yorkville Investments I, L.L.C. (Id., Schedule A at APP ) The Borrowers reauthorized the issuance and sale of up to $155 million of promissory notes by the Purchasers. (Id. at APP , 1.1.) According to the terms of the agreement, Petters and PGW had the sole discretion to use the proceeds from the Ritchie Entities loans for any purpose. (Id.) The Ritchie Entities did not require any additional security on these notes, other than Tom Petters personal guaranty. (Id.; Root Dep. at 134, APP ; Kermath Dep. at 179, R.APP00235.) Ritchie did not attempt to place any restrictions on PGW s and Petters use of the loan proceeds, as Thane Ritchie explained, Tom was pretty convincing that it would really screw up their business if we put a lot of restrictions on the loans. And we felt like the collateral was good, so we didn t really have an issue. (Ritchie Dep. at 76, APP ) Again, Thane Ritchie s understanding was that Petters planned to use the Ritchie loan money to pay off the $31 million loan to JP Morgan, and possibly other lenders to Polaroid. (Id.) At trial, Petters testified that Thane Ritchie absolutely knew that the loans were used to pay off other hedge funds. (Petters Trial Tr. at 3045, APP ) According to David Baer, PGW s in-house legal counsel, the Ritchie Entities were aware of Tom Petters problems concerning bad paper : 19

20 There were general discussions, over the time period of [the Ritchie Entities ] loans, that they wanted to potentially secure their loans by receivables at Petters Company. And and Tom refused or resisted that, and didn t want to do that because he said, listen, we have some of these, you know, issues with some of the receivables, and I don t want to pledge them to you until I can sort out what... the issues are. (Baer Dep. at 653, APP ) Ritchie identified several reasons why he felt comfortable about Petters ability to repay the loans: They had there were, you know, infinite ways they could pay us back, but one of the ways is they could get the Iconix deal done. That was first and foremost what they introduced to us. Number 2, they could go out and raise debt from other sources because they had a really good company in Polaroid. Number three especially if they cleaned up their balance sheet. Number 3, they could they had other assets at PGW which they could sell including Zink and some other venture capital and private equity assets, real estate. Or they or they could get financing on those assets. And then there s probably 2,000 other ways that I didn t name that they could do also to get to get cash in. (Ritchie Dep. at 84, R.APP00021.) At his deposition, the Trustee s counsel asked Thane Ritchie whether paying off other investors with the loaned funds, or the prospect of another lender paying off the Ritchie loans, caused Ritchie concern: Q: Let s talk about one of the alternatives that you just suggested, that is other lenders come forward to pay you off. Were you concerned at all about the fact that you were in in [sic] February 2008, within a short time period had provided $150 million in loans, that these loans were being used in part to pay off earlier investors, and that one of the avenues for you to get paid off was to have still other lenders come in? I mean did the idea that this was a Ponzi scheme concern you at all? 20

21 [Objection.] A: No, there was no Ponzi scheme in Polaroid and the CEO has already stated there was no Ponzi scheme in Polaroid. So that s ridiculous, absolutely not. (Id. at 84-85, R.APP00021.) When Petters and PGW failed to make any payments on the three notes that were due in March 2008, the Ritchie Entities extended the deadlines by 60 days without requiring additional security. (Allonges, APP ) 4. March 2008 PlayStation Deal On March 21, 2008, PCI and one of the Ritchie Entities executed a note purchase agreement for a purported diverting transaction involving Sony PlayStation game consoles. (PlayStation Note Purchase Agreement, R.APP ) Earlier, Petters had approached one of the Ritchie Entities about a loan on PlayStations that could be purchased directly from Sony and sold to Costco, and [Petters] was willing to put in $21 million subordinate to investors loaning $31 million. (Ritchie Dep. at 115, R.APP00022.) The parties contemplated that the Ritchie entity would take half of the profit from the anticipated sale, in addition to the repayments of its initial $31 million advance. (3/21/08 Letter Agreement Between PCI and Ritchie Capital at 1, R.APP ). The PlayStation advance was effected in two notes, executed by Tom Petters and PCI, with a 67% annual interest rate, and a due date of July 14, (PlayStation Promissory Notes, R.APP ) Thane Ritchie received a purported purchase agreement for the game consoles from a purchaser known as Ubid.com Holdings ( Ubid ). ( of 3/20/08 from D. 21

22 Coleman to T. Ritchie, with attachments, R.APP ). Deanna Coleman admitted to fabricating the purported purchase agreement and related documents. In re Polaroid, 472 B.R. at 48 (citing Coleman Dep. at 68-78). When the Ritchie Entities counsel questioned whether the purported purchaser, Ubid, could follow through on the $79 million deal in light of the fact that Ubid s net revenue the prior year was only $43 million ( chain of 3/21/08 between K. Rosenblum, S. Root, and others, R.APP ), that same day, PCI substituted Costco as the purchaser. ( chain of 3/21/08 between D. Coleman, S. Root, and others, R.APP ) Outside counsel Root provided some input into the PlayStation deal on behalf of the Petters Entities. (See Root Dep. at , R.APP ) Root testified that none of the discussions between the Ritchie and Petters Entities suggested that the Ritchie Entities attempted to verify the PlayStation transaction with either Ubid or Costco directly. (Root Dep. at , R.APP ) When Thane Ritchie was asked whether the Ritchie Entities sought verification that Petters had put in his $21 million share, Ritchie testified that he believed that they sought verification from M&I Bank, but he could not recall the specifics. (Ritchie Dep. at , R.APP00022.) To effect the PlayStation deal, the Ritchie Entities advanced $31 million in a March 21, 2008 wire transfer to PCI. (Martens Aff. 8, APP ; PwC Preliminary Analysis at 13-14, Ex. 295 to Martens Dep. [Doc. No. 38-4].) On the same date of PCI s receipt of the funds, PCI made several disbursements: (1) $33 million to its creditors the Fidelis Foundation, and three special purpose entities related to PCI lenders; (2) $1 million to Sun Country Airlines; and (3) $200,000 to PGW. (Id.) 22

23 5. May 2008 Promissory Notes On May 9, 2008, two additional promissory notes were executed (the May Notes ), extending an additional $12 million in loans from the Ritchie Entities. (May Notes, APP ) The May Notes included PCI as a signatory, in addition to PGW and Tom Petters personally. (Id.) The annual interest rate on these notes was significantly higher than the 80% interest rate on the previous notes the May Notes bore an annual interest rate of %. (Id.) After receiving the loan proceeds on May 9, PCI made the following disbursements: (1) over $40 million to three special purpose entities related to PCI s lenders; (2) $1.5 million to Sun Country Airlines; (3) $7.8 million to ZINK Imaging, LLC; and (4) $200,000 to PGW. (Martens Aff. 8, APP ; PwC Preliminary Analysis at 15, Ex. 295 to Martens Dep. [Doc. No. 38-4].) D. Default By May 19, 2008, the ten February Notes came due, with over $20 million of accrued interest. (Allonges, APP ; February Notes, APP ) The Ritchie Entities granted a 60-day extension, requiring no additional consideration and no security for the debt. (Allonges, APP ) In the summer of 2008, Thane Ritchie asked John Wappler and John Kermath to oversee discussions with Petters about the loans. (Ritchie Dep. at , APP ) In June 2008, Wappler asked Deanna Coleman questions about where the Ritchie Entities loan money had been distributed. (Coleman 7/28/10 Dep. at 222, APP ) This prompted Coleman to Petters, asking, I have no clue what to tell them as far as where the money went. Did you tell them it was for a deal or what do they think it was 23

24 for? (Id.) Even though it was Coleman s understanding that the Ritchie Entities were already aware that the loan money had paid off other PCI investors, she raised the issue because Mr. Petters lied to me a lot and she wanted confirmation of Petters explanation to the Ritchie Entities. (Id.) Coleman testified: I found it really hard to believe that some company would wire you $150 million to pay other investors off. So I just wanted to make sure that is actually what he told them or if he told them it was for a deal and he just was lying to me. (Id.) Petters insisted that they speak by phone on this subject, as he did not want to reply by . (Id. at 223, APP ) Petters informed Coleman that the Ritchie Entities understood that the loan money paid off other investors. (Id. at 224; 229, APP ) On June 25, 2008, Coleman responded to Wappler, telling him just that that the Ritchie money had been used to pay off other investors. (Id. at 225, APP ) Based on Wappler s response, Coleman assumed that Wappler was previously aware that the money had paid off other Petters investors, explaining, He wasn t surprised at all. I mean it was just a casual conversation. It wasn t like [ ]what investors did you use it for[ ], [ ]why did you use it to pay off the investors[ ]. It was [ ]can you do a spreadsheet showing me how the money was used to pay off the investors[ ]. (Id. at 225, APP ) Coleman testified that Petters informed Ritchie that he used the Ritchie loan money to pay off other investors, and that is what they wanted, because that is why I did the spreadsheet showing what investors we paid off. (Id. at , APP ) Nonetheless, Coleman also testified that she had no reason to believe that Ritchie knew about the Ponzi 24

25 scheme prior to the September 2008 FBI raid, or that Ritchie worked with Petters in order to shore up the Ponzi scheme prior to the raid. (Coleman 7/29/10 Dep. at 274, APP ) During early summer 2008, members of the Ritchie and Petters Entities continued to discuss the unpaid debt. (Ritchie Dep. at ; , R.APP ) At these meetings, Tom Petters focused on Polaroid s future potential in the retail market. (Id.) According to Thane Ritchie, Petters and his associates continued to promise [Ritchie] Polaroid collateral and they made a bunch of presentations about how well Polaroid was doing. (Ritchie Dep. at 152, APP ) Petters also represented that PGW s assets were solid, and that PGW had no outside creditors; we were the only ones to speak of besides some employees. (Id.) With the approaching July 2008 due dates of the notes to the Ritchie Entities, Thane Ritchie asked Wappler to investigate other sources of collateral from the Petters Entities. In re Polaroid, 472 B.R. at 49 (citing Wappler Dep. at 33; 42-43; 68-69; ; 168.) Because the loans had been unsecured up to that point and were not paid off, Wappler was concerned. Id. (citing Wappler Dep. at ) Wappler believed that difficulties in the general capital markets added pressure on all of the parties to the notes, including the Ritchie Entities. (Id.) The testimony of Petters outside legal counsel confirms the escalating demands faced by the Petters Entities from their creditors at this time: [M]y recollection is that August/September were a period of intense pressure coming from numerous creditors demanding payment and/or collateral. (Root Dep. at 159, R.APP00260.) 25

26 In August 2008, Thane Ritchie himself became more involved in discussions with the Petters Entities, after learning of a lawsuit brought by another lender to Tom Petters, Acorn Capital Group ( Acorn ). (Ritchie Dep. at , APP ) In the suit filed in the United States District Court for the Southern District of New York, Acorn alleged that pursuant to a grant made by Tom Petters, it held a security interest in some of Polaroid Corporation s intellectual property rights, but that Petters had committed fraud in the inducement by misrepresentations and breaches of warranty regarding the identity and value of the collateral. In re Polaroid, 472 B.R. at 50 (citing Acorn Complaint, Acorn Capital Grp., LLC v. Petters, 08-CV-7236 (S.D.N.Y.) [Doc. No. 65].) The Acorn suit caused Thane Ritchie to question Tom Petters representations that Polaroid s assets were unencumbered. (Ritchie Dep. at ; , R.APP00030.) Ritchie testified, Well, Tom had promised us that collateral, and he told us he wasn t giving it to anyone else. And, he, in fact, was giving it away or according to the lawsuit anyway. (Id. at 184, R.APP00030.) Subsequently, Ritchie contacted Petters in order to finalize our Polaroid collateral deal. (Id. at 153, R.APP00027.) In response, [Petters] said that Acorn had limited... pieces of the Polaroid assets, but there were other parts of Polaroid that they could give us and that he would try to give us other pieces of collateral to make up for the difference of the fact that we weren t getting all of Polaroid. (Id.) Ritchie dispatched Wappler to Minnesota, telling him not to leave until we had our collateral. (Id. at 175, R.APP00029.) By September 1, 2008, all of the notes were in default to the Ritchie Entities. (February Notes, APP ; May Notes, APP ; Allonges, APP

27 2205.) Ritchie was disinclined to litigate Petters default: litigation is expensive, it s costly and it can actually lead to you getting paid back slower than faster. (Ritchie Dep. at 159, APP ) Instead, he continued to press Tom Petters for collateral, in consideration for not calling the notes due. ( of 8/28/08 from T. Ritchie to T. Petters, R.APP00336; of 9/6/08 from M. Legamaro to D. Baer, S. Root, and others, R.APP00337; Second of 9/6/08 from M. Legamoro to D. Baer, S. Root, and others, R.APP00339.) The prospect that Tom Petters and his corporate structure were insolvent was an issue on the table and being discussed between Tom Petters and the Ritchie organization. (Root Dep. at , R.APP00261.) Ritchie s outside counsel raised with Dave Baer, PGW s in-house counsel, the specter of a lawsuit, absent a blanket lien on the assets of PCI : [Given that this is not the first such inability to give us what which has been promised and the overall unwillingness to be transparent with us, you are only further putting the nail in your coffin, presumably causing things to unravel from here. ] If you want to work an amicable [sic] resolution of our issues, you must immediately release to us credit agreements which supposedly impact your ability here. Frankly, you are losing credibility fast and that will be a very dangerous path to take. ( of 9/6/08 from M. Legamaro to D. Baer, S. Root, and others, R.APP00337.) Also at this time, in early September 2008, the Petters Entities in general, and Polaroid individually, experienced strain and difficulty paying creditors. Creditors called for payment, audits, and the physical inspection of collateral. ( chain of 9/4/08 between D. Coleman and T. Petters, R.APP00340.) On September 4, 2008, Tom Petters sent the following to David Baer and others, expressing increasingly desperate concerns about the Petters Entities financial affairs: 27

28 I have serious need to get this done so we can get out of the box? Otherwise I am afraid I will not be able to? Any ideas on short term money to nbe [sic] taken out in 30 days nby [sic] this new 200mm dollar deal will A [sic] must. Any or all ideas [sic] I can't be there till Friday afternoon to [sic] late to do Sabes and Ubid and others. I know everyone will ask what about the money we are owed. So do I. We need hedge deal resolved first or risk even larger problems. We need a team effort on getting Fhut, real estate, sun country notes, mu equity in hedge fund and or whatever assets we need or choices are bleak. please respond ig [sic] you have any sold [sic] ideas for all or part of a 60million dollar bridge??? I need your help. Thanks tom ( chain of 9/4/08 between T. Petters, D. Baer, and others, APP ) Polaroid also experienced a cash shortage and delinquency in paying vendors. ( chain between Polaroid employees S. Hardy and P. Kalmbach, and others, R.APP00341.) Polaroid s Katherine Dugan testified about Polaroid s financial situation as of September 2008: I know that we were extending payables with our vendors. That much I knew. It was common knowledge that Polaroid was struggling. We had no working capital facility. We had to buy parts from Alps and other vendors in order to be able to launch the Zink product. That was creating a strain on the company with no working capital facility in place. (Dugan Dep. at 84-85, APP ) Dugan testified that Polaroid was not meeting its debts as they came due. (Id. at 84, APP ) Polaroid s efforts to obtain working capital included discussions with an investment group and discussions about selling a minority stake in Polaroid. (Id. at 85, APP ) Polaroid s CEO Mary Jeffries generally held a more positive view of Polaroid s financial situation in early-mid September 2008, believing that it remained a going concern. (Jeffries 9/29/10 Dep. at , APP ) But Jeffries acknowledged that by September 19, 2008, Polaroid 28

29 was not able to pay its debts as they came due, at least as to trade accounts payable. (Jeffries 9/30/10 Dep. at 63-64, APP ) Amid concerns about Acorn s allegations that Polaroid had preexisting secured debt to an Acorn-related special purpose entity, the Ritchie Entities outside counsel questioned the value of taking security against Polaroid at all. ( chain of 8/28/08 between K. Rosenblum, S. Root, and others, R.APP00342; chain of 8/28/08 between K. Rosenblum, S. Root, and others, R.APP ) Between September 15-16, 2008, Thane Ritchie and Tom Petters exchanged a series of s, with Ritchie demanding that they finalize their loans, urging let s get docs signed. ( chain of 9/16 between T. Petters and T. Ritchie, R.APP00349.) On September 18, Ritchie threatened Petters that this will get very messy without an agreement in place today, claiming that he was last money in and should be first out, as compared to the Lancelot entities that had lent into PCI. ( of 9/18/08 from T. Ritchie to T. Petters, R.APP00351.) E. Grant of Trademark Security Interests Thane Ritchie met with Tom Petters twice in September (Ritchie Dep. at 146, R.APP00026.) At the first meeting, on September 19, the parties executed a final extension agreement on the ten outstanding notes five days before the FBI raid on Petters home and office. (Extension and Amendment Agreement, APP ) Petters was excited about the value of Polaroid and wanted to raise money from I think Deutsche Bank and Morgan Stanley and we were hoping that he would do that and pay us back. (Ritchie Dep. at 146, R.APP00026.) In addition to the extension, Petters, on 29